To ensure that the quality improvements were directed and translated into concrete financial outcomes, Leming also began to implement a Balanced Scorecard for the division. By the end of 2007, progress was being made. Sales had increased to $26,000,000, and improvements were meeting or beating expectations. For exam- ple, rework costs had dropped to $1,500,000.
At the end of 2008, two years after the turnaround quality strategy was imple- mented, Leming received the following quality cost report:
|
Quality training
|
$ 500,000
|
|
Supplier evaluation
|
230,000
|
|
Incoming inspection costs
|
400,000
|
|
Inspection costs, finished product
|
300,000
|
|
Rework costs
|
1,000,000
|
|
Scrapped units
|
200,000
|
|
Warranty costs
|
750,000
|
|
Sales returns (quality-related)
|
435,000
|
|
Customer complaint department
|
325,000
|
|
Total estimated quality costs
|
$4,140,000
|
|
Leming also received an income statement for 2008:
|
|
Sales
|
$30,000,000
|
|
Variable expenses
|
22,000,000
|
|
Contribution margin
|
$ 8,000,000
|
|
Fixed expenses
|
5,800,000
|
|
Income
|
$ 2,200,000
|
Leming was pleased with the outcomes. Revenues had grown, and costs had been reduced by at least as much as he had projected for the two-year period. Growth next year should be even greater as he was beginning to observe a favor- able effect from the higher-quality products. Also, further quality cost reductions should materialize as incoming inspections were showing much higher-quality purchased components.
Required
1. Identify the strategic objectives classified by Balanced Scorecard perspectives. Next, suggest measures for each objective. Classify the measures as lead or lag measures.
2. Using the results from Requirement 1, describe Leming's strategy using a series of if-then statements.
3. Explain how you would evaluate the success of the quality-driven turnaround strategy. What additional information would you like to have for this evaluation?
4. Explain why Leming felt that the Balanced Scorecard would increase the likeli-hood that the turnaround strategy would actually produce good financial out-comes.
5. The targeted future state for rework was 6 percent of sales for 2007. Was the target met? Describe the role for continuous improvement in Leming's strategy.
6. Of the quality activities listed in the 2008 report, which ones are non-value-added? By eliminating all non-value-added activities, how much further cost reduction is possible?